March 24, 2010

Takings victories made harder

By Takings victories made harder

Author: R. S. Radford

Professor Richard Epstein of the University of Chicago is universally acclaimed as one of the nation’s foremost champions of private property rights. This well-deserved reputation dates back to his classic 1985 text, Takings: Private Property and the Power of Eminent Domain.

The Cato Institute, a Washington, DC think tank, is widely regarded as the Mecca of libertarian and conservative political philosophy and policy.

So when Richard Epstein appears in the Cato journal, Regulation, enthusiastically trashing an important legal victory for property owners under the Takings Clause, we can be forgiven for asking, in the immortal words of 4 Non Blondes: Hey, what’s going on?

In the case in question, Guggenheim v. City of Goleta, the Ninth Circuit Court of Appeals ruled that a law controlling rents in a mobile home park was an unconstitutional taking of the park owner’s property. This decision was both obvious and surprising. Obvious, since every economist who has ever examined the question has concluded that ordinances of this type are little more than legalized theft. Or, in the more genteel terms of the Guggenheim opinion, a "naked wealth transfer." The way it works is simple: park tenants lobby the city council to hold their rents below the market. This causes the value of mobile homes in rent-controlled parks to rise. The tenants then sell the mobile homes and pocket the dollar value of the reduced rent liability, suitably capitalized into the future. In no other form of economic regulation can the beneficiaries simply "cash out" like this, directly converting their successful lobbying efforts into coin of the realm. Since the increased sales value of the mobile homes is simply the flip side of the law’s negative impact on the value of the park, the taking of property is clear.

What made the Guggenheim decision surprising is that Judge Jay Bybee’s majority opinion carefully and thoughtfully negotiated the doctrinal mine field the Supreme Court has laid out over the years to make it difficult, if not virtually impossible, for property owners to prevail in takings cases. Most such claims have to be forced into the conceptual framework of a nearly incoherent 1978 decision, Penn Central Transportation Corp. v. City of New York. Under the Penn Central rubric, courts are supposed to weigh three factors to determine whether, on balance, a taking has occurred. It goes without saying that none of these factors – the character of the government action, the economic impact of the regulation, or the interference with an owner’s reasonable, investment-backed expectations – has ever been defined. Nevertheless, Guggenheim made this analytical maze seem almost reasonable, explaining that the larcenous character of Goleta’s rent law, coupled with its significant reduction in the value of the park, weighed in favor of the plaintiff, while the city might arguably prevail on the expectations issue, since rents in the park had previously been controlled by an identical county ordinance. Still, if Penn Central is to be taken seriously as a legitimate balancing test, prevailing on two criteria out of three should be all you need to win.

Given the rarity of victories for property owners under Penn Central (nobody has ever won such a case at the Supreme Court), you might think the Guggenheim opinion would have been the subject of massive celebration by property-rights advocates. And so it was, in many cases. But then Prof. Epstein came out swinging.

In his Regulation article, entitled "Takings Law Made Hard," Epstein sets out to "identif[y] a number of technical deficiencies" in the Guggenheim opinion, and calls for it to be reviewed by the United States Supreme Court. But as technical deficiencies go, nothing in Judge Bybee’s opinion compares to those in Prof. Epstein’s critique.

For example, Epstein considers it "one of the major difficulties" of the opinion that the Goleta rent ordinance had been challenged on a number of previous occasions, dating back to "the 1987 opinion of Hall v. City of Santa Barbara." But in fact, the Guggenheims were the first plaintiffs to challenge the city’s ordinance, filing their suit just one month after it was adopted. As mentioned above, an identical rent ordinance had previously been imposed by the County of Santa Barbara, before Goleta’s incorporation. But that law was unrelated to the City of Santa Barbara ordinance that was struck down in the Hall case.

In the same vein, Epstein informs his readers that "[b]ack in 1979 … California passed a generalized rent control ordinance applicable to mobile home pads." That would certainly come as a great surprise to both California park owners and their tenants. The state’s Mobilehome Residency Law, adopted in 1978, strictly limits the grounds for evicting tenants from mobile home parks (something that Epstein attributes to the Goleta ordinance), and restricts the provisions that may be included in rent agreements, but it is silent on rent control.

These factual errors (and others) routinely would have been corrected by student editors if Prof. Epstein had chosen to publish in a traditional law review. But unfortunately, mistaken facts are not the only flaws in his analysis of Guggenheim.

Epstein calls Judge Bybee’s decision "an audacious shocker" because "in the last several generations the courts have never sustained a facial takings challenge to a statute under the Takings Clause." This claim came as something of an audacious shock in itself, since I personally have been involved in three published appellate decisions that found statutes to violate the Takings Clause on their face, and I could name others.

But wait, there’s more. The Supreme Court, according to Epstein, has held that "anyone who buys any property with notice that certain regulations are in place cannot protest the takings, which would doom the Guggenheim challenge." This was precisely the argument, of course, that the Supreme Court repudiated in an important case litigated by Pacific Legal Foundation a decade ago, Palazzolo v. Rhode Island. Although Judge Bybee draws on Palazzolo throughout his opinion, Prof. Epstein doesn’t mention it.

Equally remarkably, under Epstein’s interpretation of takings doctrine, the fact that the Guggenheims were receiving a rate of return of around 10% on their investment "meets the state’s obligation under Penn Central." In other words, Penn Central ’s three-factor balancing test, in Epstein’s view, should be collapsed into a single inquiry: how much did the government leave the property owner? If you’re left with a 10% return, it apparently doesn’t matter to Epstein how much the government took – you get nothing for your loss. Thankfully for property owners, as bad as Penn Central is, it’s not as hard to vindicate your constitutional rights under that decision as it would be under Epstein’s singular interpretation.

Building to a crescendo, Prof. Epstein seemingly belittles Judge Bybee for "biting off more than he could chew" in ruling in favor of the park owner, and asserts that Guggenheim’s "startling new rule," if allowed to stand, would have the effect of striking down all land-use regulations. And all the while, Epstein simply ignores the unique qualities of mobile home park rent control that set such measures well apart from any other sort of property regulations. Unique qualities that are set out at length in Judge Bybee’s opinion, and have repeatedly been pointed out by economists in a body of literature stretching back over the past 25 years.

Whatever Prof. Epstein’s reasons may have been for rushing into print to condemn the Guggenheim decision, his effort has apparently not gone unnoticed. On March 12, the Ninth Circuit granted the City of Goleta’s motion to rehear the case en banc, meaning that this rare victory for property owners has been snatched away, at least for the time being. Those of us in the trenches of the never-ending war for property rights will have to fight this battle over again. If, against all odds, another hard-won victory is achieved, can we at least hope not to come under hasty fire from behind our own lines?

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